- June 3, 2022
- Posted by: admin1
- Category: DPN Topics
With fuel prices remaining unchanged for almost two months despite a rise in costs, oil companies have started detailing under-recoveries, or losses, which are as high as ₹17.1 per litre on petrol and ₹20.4 on diesel as of Thursday.
Local pump rates are benchmarked to about $85 per barrel crude oil price while Brent is currently trading at $113. This has resulted in a gap between cost and selling price, referred to as under-recovery, or loss.
Under-recovery is a term used in the Indian Petroleum sector to denote the notional losses that oil companies incur due to the difference between the subsidized price at which the oil marketing companies sell certain products like diesel, LPG and Kerosene and the price which they should have received for meeting their cost of production.
Concept of “Under Recovery” and “Loss” was examined by “Committee on Pricing and Taxation of Petroleum Products” – chaired by Dr. C. Rangarajan, Chairman of Prime Minister’s Economic Advisory Council, in 2006.
The committee observed that: “Refining of crude oil is a process industry where crude oil constitutes around 90% of the total cost. Since value added is relatively small, determination of individual product-wise prices becomes problematic. The oil marketing companies (OMCs) are currently sourcing their products from the refineries on import parity basis which then becomes their cost price. The difference between the cost price and the realized price represents the under-recoveries of the OMCs. The under-recoveries as computed above are different from the actual profits and losses of the oil companies as per their published results. The latter take into account other income streams like dividend income, pipeline income, inventory changes, profits from freely priced products and refining margins in the case of integrated companies.”
Thus, the difference between the required price based on TPP/ IPP parity and actual selling price realized (excluding taxes, dealer commission) represents the under-recoveries. This is different from the concept of Gross Refinery Margin which indicates the difference between the wholesale weighted average price of various products produced by a refiner and the refiner’s composite acquisition cost of crude oil. The “net margin” indicates gross margin minus operating costs of the refiner.
Under recovery and Gross Refinery margin are the two terms often seen in petroleum pricing. With reference to this consider the following statements:
- Gross Refinery Margin which indicates the difference between the wholesale price of various products produced by a refiner and acquisition cost of crude oil.
- Under recovery indicates the economic profit which is not the true profit of a refiner.
- Under recovery also indicates the difference between the subsidized price at which the oil marketing companies sell certain products like diesel, LPG and Kerosene and the price which they should have received for meeting their cost of production.